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Voltas: Topline subdued, but margins improve - Views on News from Equitymaster
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Voltas: Topline subdued, but margins improve
Jan 30, 2014

Voltas has announced the results for the third quarter and nine month period of the financial year 2013-2014 (3QFY14). The company has reported 3.1% YoY decline in sales while net profits have declined by 19.4% YoY during the quarter. Here is our analysis of the results:

Performance summary
  • Net sales decrease 3.1% YoY in 3QFY14.
  • Operating profit increase sharply by 193.9% YoY during the quarter as operating profit margins expand from 2% in 3QFY13 to 6.1% in 3QFY14.
  • The company reported a net profit of Rs 619 m, a fall of 19.4% YoY. This was mainly due to the fact that the exceptional gain during the quarter was merely Rs 43 m as against Rs 598 m reported in 3QFY13.
  • The order book of electro mechanical projects and services segment stood at Rs 39.5 bn during the quarter as against Rs 42.1 bn in 3QFY13.
  • During the nine month period (9MFY14), sales and net profits declined by 3.3% YoY and 27.1% YoY respectively.

Consolidated financial snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Sales 11,502 11,150 -3.1% 39,218 37,933 -3.3%
Other operating income  24 44 86.1% 120 99 -17.3%
Expenditure 11,293 10,510 -6.9% 37,717 36,302 -3.8%
Operating profit (EBDITA) 233 684 193.9% 1,622 1,731 6.7%
Operating profit margin (%) 2.0% 6.1%   4.1% 4.6%  
Other income 243 170 -29.9% 775 694 -10.5%
Interest 72 54 -24.1% 278 289 4.1%
Depreciation 60 60 0.2% 218 180 -17.8%
Onerous contract  - -   - -  
Exceptional gains/(losses) 598 43 -92.9% 754 42 -94.5%
Profit before tax 942 783 -16.9% 2,654 1,998 -24.7%
Tax 181 164 -9.5% 674 549 -18.5%
Profit after tax/(loss) 761 619 -18.7% 1,981 1,448 -26.9%
Minority interest in (profit)/loss 7 -   8 1 -84.6%
Share of associates  - -   - -  
Net profit 768 619 -19.4% 1,989 1,450 -27.1%
Net profit margin (%) 6.7% 5.5%   5.1% 3.8%  
No. of shares         330.9  
Diluted earnings per share (Rs)         4.7  
Reported P/E ratio (x)*         25.2  
# Based on latest shares outstanding

What has driven performance in 3QFY14?
  • Voltas reported de-growth of 3.1% YoY in its consolidated sales during 3QFY14. In the Electro-mechanical Projects and Services (EMPS) segment which constituted 57.7% of net sales during the quarter, sales declined by 19.4% YoY on account of delay in execution of a few large projects.

  • Engineering Products and Services (EPS) segment which constituted 10% of net sales during the quarter grew by 4.8% YoY as both the Textile Machinery and Mining & Construction Equipment business performed well despite poor market conditions.

  • Unitary Cooling Products (UCP) segment grew by 45.3% YoY driven by healthy volume growth of 37% YoY in air conditioners (AC). Deeper penetration in tier-2 and tier-3 towns as well as robust rural demand driven by good monsoons aided the growth in revenue. The company retained its market leadership with 20.4% share over the quarter compared to 17.1% during 3QFY13.

  • As far as operating performance is concerned, the EMPS segment reported a loss at the EBIT level owing to cost overruns in certain international projects. However, EBIT margins in both the EPS and UCP segments surged substantially. In the EPS segment, the EBIT margin increased from 24.7% to 32.2% YoY. In the UCP segment, the EBIT margin increased from 6.2% in 3QFY13 to 13.2% in 3QFY14 on account of strong growth in 5 & 3 Star ACs which together contribute 90% of total sales volume.


    Segment-wise performance#
    (Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Electro-Mechanical Projects & Services (EMPS)
    Revenue 7,973  6,429 -19.4% 23,162 20,067 -13.4%
    % share 69.3% 57.7%   59.0% 52.9%  
    PBIT margin 0.7% -0.7%   2.0% -1.3%  
    Engineering Products & Services (EPS)
    Revenue 1,067 1,118 4.8%  3,272 3,495 6.8%
    % share 9.3% 10.0%   8.3% 9.2%  
    PBIT margin 24.7% 32.2%   20.5% 27.0%  
    Unitary Cooling Products (UCP)
    Revenue 2,388 3,470 45.3% 12,501 13,981 11.8%
    % share 20.8% 31.1%   31.9% 36.9%  
    PBIT margin 6.2% 13.2%   7.8% 11.1%  
    Others
    Revenue 77  134 74.6%  303 396 30.5%
    % share 0.7% 1.2%   0.8% 1.0%  
    PBIT margin -15.7% 1.0%   -0.2% 1.2%  
    Total
    Revenue 11,504 11,151 -3.1% 39,238  37,939 -3.3%
    Less: Inter segment revenue  (2) (2)   (19)  (6)  
    Net Sales 11,502 11,150 -3.1% 39,218  37,933 -3.3%
    PBIT margin 4.0% 7.0%   5.4% 5.9%  
    # The segmental results are before onerous contract & exceptional items

  • The company reported exceptional gains of Rs 42.5 m during the quarter as against Rs 597.5 m during 3QFY13. This resulted in a decline of 19.4% YoY in the company’s bottomline.

  • Voltas' carry forward order book at the quarter end stands at Rs 39.5 bn. The domestic and international segments constitute 54% and 46% of the total order book respectively. Order inflow during the quarter was about Rs 1.35 bn. The orders secured were primarily from domestic markets.

  • During 9MFY14, net sales declined by 3.3% largely due to poor performance of EMPS segment. While the operating profit of the company increased by 6.7% YoY, profit after tax declined by 27.1% YoY.
What to expect?

While Voltas' topline performance has remained muted in the financial year so far, its profitability has been improving over the last few quarters despite the challenging macroeconomic environment. Voltas has devised a strategy to remain selective in choice of projects given the risk based parameters. Also, the company will take only those projects which satisfy its internal margin threshold level of about 5%. Apart from maintaining its leadership position in ACs, the company has gained significant market share in the West and East zones as well, which have not been the key regions for the company for its cooling products. Voltas also boasts of a stronger balance sheet as compared to its industry peers with its debt to equity ratio at 0.11 times. This can help the company face the downturn and emerge stronger in the long term.

At the current price of Rs 117, the stock is trading at 25.2 times its trailing twelve month earnings. We maintain our HOLD view on the stock.

However, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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